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Home buyers are making all sorts of sacrifices in today\\u2019s market. Without enough homes to meet demand, some buyers are eliminating contingencies and offering way more than the listing price. That may be a simple transaction if you\\u2019re paying cash, but for those getting a loan, a \\u201cgap\\u201d between the sky-high amount offered to clinch the deal and the appraised value of the home could be a deal breaker.

A lot of buyers are resorting to extreme measures to win the home they so desperately want to buy. They may offer $50,000, $100,000 over asking and waive ALL contingencies, meaning that if they back out, they lose their deposit.

And then when it comes time to get the house appraised, buyers are finding out that the lender will only cover, let\\u2019s say, 80% of the appraised value. That means the buyer\\u2019s down payment must include the other 20% PLUS any amount the buyer offered to win that home. That\\u2019s left some buyers scrambling to make up the difference for what\\u2019s being called \\u201cthe appraisal gap.\\u201d

HousingWire heard from a few loan officers who say that some people are caught off-guard, and are borrowing from relatives or tapping into retirement and stock-trading accounts to make up for that gap. Those distributions can also trigger tax events, making the purchase that much more expensive.

But the problem isn\\u2019t just that buyers are bidding the prices too high. Some real estate experts feel that many appraisers have not caught up to a market that\\u2019s been accelerating rapidly. They rely on historical data which doesn\\u2019t reflect what\\u2019s happening today. One Southern California processor told HousingWire that \\u201calmost all of the appraisals lately\\u2026 have been low, by a lot.\\u201d

HousingWire reports that: \\u201cWhile some appraisers understand the increasing market and try to justify soaring prices, others are not comfortable with the new reality and provide valuations more in line with previous sales.\\u201d

The situation can lead to a costly mistake for buyers who have written a non-contingent offer. With no clause that allows them to back out of the deal, they must come up with the additional cash. If they can\\u2019t, the deal will likely collapse and they\\u2019ll lose their deposit. But it may also be possible to challenge the appraisal.

A buyer or buyer\\u2019s agent might be able to offer comps that justify a higher amount, or maybe hire another appraiser for a second opinion. Finding another lender could also get you another appraisal but you\\u2019d have to make sure the new lender doesn\\u2019t use the same appraiser.

Doing more to prepare for the appraisal gap could also help. Maybe getting those comps ahead of time, and making sure there\\u2019s a little extra cash in the bank for a bigger deposit. If not, lower the dollar amount being offered, and maybe avoid an offer that doesn\\u2019t give you an out.

Real estate agents can also help by educating their clients about the pitfalls of a non-contingency offer that\\u2019s substantially over the asking price.

For real estate investors who\\u2019d like to learn more about appraisals for investment properties, you\\u2019ll find a few videos on our website at NewsForInvestors.com. We\\u2019ll also have a link on the podcast player page for this episode to those videos.

Video Link: https://www.realwealthnetwork.com/learn/how-to-read-appraisal-report-investment-property/

Links:

1 - https://www.housingwire.com/articles/the-appraisal-gap-is-complicating-deals-across-the-country/

2 - https://www.inman.com/2021/03/23/how-to-protect-your-buyers-from-appraisal-catastrophes/

3 - https://www.foxbusiness.com/money/how-to-refinance-mortgage-low-home-appraisal